Monday, October 25, 2010

A Weak Canadian Dollar is Great for our Exports!!!

I am sick and tired of hearing about how a weak Canadian dollar is good for our economy, particularly our exports. While it's true that export industries will see short-term gains from a weak currency, for everyone else a loss in purchasing power is usually considered a bad thing.

A strong currency lowers raw material costs, capital costs and naturally brings down interest rates (instead of the centrally planned artificial garbage we have now). It makes us more competitive globally. A strong currency raises the purchasing power of individual Canadians, leading to higher living standards. Since we get paid in Canadian dollars, the purchasing power of our wages relies on the value of our dollar. A higher dollar means higher purchasing power (buy more for less) and a lower dollar means lower purchasing power (buy less for more). A weak currency means we'll have to work longer and spend more just to buy things we could have gotten a lot cheaper had our dollar been stronger.

It's obvious in third-world countries – weak currencies can't buy anything. Why is this country actively taking that route? What benefit could we get from destroying the value of our money?

People who are saving their money are seeing it destroyed by inflation. Every year our dollar becomes weaker and while mainstream economists like to go on about how great this is and how beneficial it is for our exports, ask anyone living on a fixed income how easy it is getting by with less.

China, Japan, Germany – all these countries have rising currencies and strong trade surpluses. One could argue that China does have cheap exports but as the Chinese allow their currency to appreciate while we debase ours, how long will we consider those exports 'cheap'? And Germany? Germany certainly doesn't have cheap exports, but here they are with a trade surplus and a strong currency. Contrast that to our trade deficit (2.7 billion this past July) and our weakening dollar (estimated to lose half of it's current value within the next 30 years... and those are official estimates).

If you want a product or resource from a country other than your own, then you need that countries currency. Canada is a vast country with vast resources; we have water, oil, gold mines – you name it and it's probably somewhere in Canada. So if people want our resources they'll have to get their hands on our currency. But when our current monetary policy is to print as much money as we can, the laws of supply and demand get muddled and government intervention backfires. Inflation is just a hidden tax. Our automobile industry and forestry may get a short-term boost, but it'll be at the expense of all Canadians.

At this point you might be asking “But Caleb, you have no formal economic background, nor hold any degrees, why should I believe you over the goons on TV?” This is a good question, so I turn now to Peter Schiff, who expertise on economics dwarfs anything I've learned. Schiff has been on TV, radio, he's written countless articles and has his own brokerage firm. This guy is an expert. Here's some samples from an article he wrote about a devalued American dollar. The fundamentals of weak currency are the same for the US as for Canada. The obvious difference is that the Greenback is the world's reserve currency, but that's a whole different story...

From Peter Schiff:“A cheaper dollar helps domestic manufacturers because it makes local costs, such as wages and rents, decline in relation to the costs borne by international competitors. While this is true, it also means that American workers and landlords see a corresponding decline in the real values of their pay and rent. Given that such declines negatively impact living standards, such developments hardly seem worth celebrating.”

“Furthermore, as a weaker dollar forces up domestic consumer prices, American workers, suffering from declining real incomes, will ultimately press their employers for more generous pay raises. Rising nominal wages will eventually undermine the competitive gains associated with lower real wages that initially resulted from the falling dollar. Similarly, landlords will look to raise rents to make up for the falling purchasing power of their rental income.”

“any advantages U.S. manufacturers might get from cheaper dollars may be lost to higher taxes.”

“The bottom line is that true competitiveness comes from sound money, high savings, low taxes, minimal government regulation, hard work, and the entrepreneurial spirit. Laying the hopes of America's industrial salvation on currency devaluation will only backfire, leaving American manufacturers even less competitive in the future than they are today.”